Topline
Japanese investment bank Nomura on Monday became the latest bank to predict an oncoming recession in the U.S. economy sometime later this year—joining the likes of Deutsche Bank and Morgan Stanley—just days after the Federal Reserve announced a steep hike in interest rates in an effort to control surprisingly high inflation numbers.
Key Facts
According to multiple outlets, economists from Nomura warned that a “mild recession” sometime around the end of 2022 was now more “likely” due to the Fed’s recent moves.
Nomura’s economists added that inflation is likely to “remain elevated” throughout 2022 and projected that the U.S. economy is likely to contract by 1% next year, compared to an earlier prediction of 1.3% growth.
On Friday, Deutsche Bank—the first bank to project an upcoming recession in late 2023—updated its forecast noting that it now expects an “earlier and somewhat more severe recession,” projecting a 3.1% contraction of the GDP in the third quarter of 2023.
Two days before the Federal Reserve’s rate hike, Morgan Stanley CEO James Gorman appeared to be slightly more optimistic, placing the odds of a downturn at “50-50” adding that a “deep or long recession” was unlikely.
In a recent note, the chief economist at Moody’s Analytics warned the risks of a recession were “uncomfortably high” and “rising,” and said avoiding such a situation would require “very deft policymaking from the Fed and a bit of luck.”
In a note published in April, Goldman Sachs economists projected a 35% chance of a recession in the following 24 months but implied the risk was rising following the Fed’s recent rate hike.
Contra
Despite projections by economists, President Joe Biden in an interview last week insisted that a recession was not “inevitable” adding that the U.S. is in a “stronger position” than any other country to fight inflation. Biden added that the American people should not “believe a warning” and urged them to instead wait and see whose prediction is correct.
Key Background
On Wednesday, the Federal Reserve raised interest rates by 75 basis points to a target range of 1.5% to 1.75%. Last week’s move was the steepest rate hike enacted by the regulator in 28 years as it looked to battle surging inflation. The Fed’s steep rate hike came after the Labor Department released data showing annual inflation in the U.S. surged to 8.6% in May—the largest 12-month increase in consumer prices the country has witnessed in over 40 years. Goldman Sachs has warned its clients that it expects another 75 basis point hike in July.